With the smart phone market in the United States and Europe maturing, many analysts and investors studying Apple Inc. (NASDAQ:AAPL) have suggested that the company’s revenue might move toward an Asian base, with China acting as the embodiment of that idea. Yesterday’s earnings report from the Cupertino company betrayed that narrative and left Apple Inc. (NASDAQ:AAPL) shareholders with less to hold onto.
Apple Inc. (NASDAQ:AAPL) revealed in its earnings report that it had garnered just $4.6 billion in revenue from China in the June quarter, declined more than 40% from the previous quarter and around 14% on the same quarter last year. The major decline came from Hong Kong where sell-through declined 20%, while sales on the Chinese mainland actually grew by 5%.
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Apple sales affected by China’s economic problems
Apple Inc. (NASDAQ:AAPL) was not particularly forthcoming on the reasons behind its fall in revenue from China, though it did mention that economic pressures in the country were probably having a negative effect on the numbers. The company is probably working on a deal that would see iPhone support come to China Mobile, but the lack of support on that network does not explain the fallout in this quarter.
Like so many windmills, China may have been a false target. Apple Inc. (NASDAQ:AAPL) faces tough competition from the increasing quality of budget priced Android smartphones, and the country has been rumored to be slowing down for the last couple of years. It seems clear that China’s economy is not growing like it used to, and that it is no longer the market that analysts following Apple Inc. (NASDAQ:AAPL) have been talking about. It may never have been that market.
Apple cannot look to China for rescue
Apple Inc. (NASDAQ:AAPL) shares rose by more than 5% on today’s trading in response to the country’s earnings report. The response is fairly justified, Apple Inc. (NASDAQ:AAPL) had a great quarter. Great quarters are not the sort of thing that will drive shares to $600, however.
Apple Inc. (NASDAQ:AAPL) needs to show the market that it can still innovate in order to bring its share price back to the top. That will require the release of a new product. There’s little downside in the shares if results stay positive, but the company has a limited upside without making a massive impression on the market. A large magnitude of valuation leads to a compression in valuation multipliers. Apple Inc. (NASDAQ:AAPL) needs to innovate.